Extended stay – the future of the hotel industry?

By Marine Duchesne, associate director in Christie & Co’s hotel consultancy team

Extended stay accommodation (including serviced apartments and aparthotels) is evolving as a major sub-sector in the hotel industry. Such businesses have been sprouting across the UK and Europe in recent years since Fraser serviced apartments launched in Singapore in 1998, and it is increasingly attracting the interest of investors and key operators who want a stake in the market.

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In a nutshell, serviced apartments tend to cater for longer stays, are usually situated in residential areas and sometimes offer a 24/7 reception but no communal food and beverage facilities. Aparthotels on the other hand present a more hybrid model, mostly comprising small apartments within a purpose-built block with kitchenettes and limited services such as a breakfast room, cafe or a mini-gym. Key players with extended stay accommodation products in the UK include BridgeStreet, IHG’s Staybridge Suites and the Irish group Staycity amongst many others.

But why is extended stay becoming more popular? We firstly need to look at how consumer behaviour and needs are changing. The rise of Airbnb’s share in the accommodation market shows that self-catering accommodation is becoming increasingly sought after by leisure as well as business travellers. Traditional hotel service often places restrictions on the times you arrive, eat and drink and in the digital age when flexibility is everything, the layout of extended stay accommodation provides clients with independence while not having to worry about keys, arrival time or cleaning.

Extended stay also offers interesting remedies to a number of challenges that the traditional hotel market faces, allowing the industry to compete more effectively with disruptors such as Airbnb. With increases in the National Living Wage, pensions auto-enrolment and the Apprenticeship Levy which all came into effect in April 2017, the fact that extended stay accommodation requires less staff – as little as a few receptionists and outsourced housekeeping in some instances – is a huge attraction for operators and investors.

Opportunities in this segment are strong in the UK as cities like London are still undersupplied compared to other global cities, with extended stay accommodation currently only accounting for around 7.5% of total accommodation in the capital (according to AM:PM Hotels). Development has been the primary route for investors into serviced apartments in the past few years but when acquisition opportunities arise, we expect to see strong interest from institutional investors and private equity funds getting increasingly comfortable with the operating model. Recent M&A deals, such as the 70% stake acquisition of Go Native by US investor Ares Management as well as the merger between Oaktree Capital Management’s CLSA and SACO, confirm this trend.

A model which has been particularly popular with developers and investors in recent years is dual-branded buildings with typical hotel operations coupled with a serviced apartment/aparthotel component, creating significant operational synergies and driving ROI. Therefore, it is clear that the sector offers great opportunities for investors, assuming the right operator is in place to leverage their sector expertise, target the optimum clientele and thus maximise the owner’s returns. Tipped as the future of the hotel industry, it is a great time to get involved in and clued up on the lucrative and quickly expanding sector.